The curious case of Internet of Things

Internet of Things is here. And it is already changing the way consumers buy and use products and services. In one of our previous publications, we looked at the impact of this on the Consumer Durables space. Every business, especially ones where wear-and-tear (e.g. tires) or replenishment (e.g. cartridge in a printer) causes frequent repeat purchases, is following the Internet of Things (IoT) wave with a lot of interest.

Products are being sold ‘as a service’ (through pay-per-use pricing) and interestingly, services are being sold ‘as a product’ (as AMCs and Extended warranties).

Let’s continue with these two examples: tires, and printer cartridge. Both businesses see IoT as an opportunity but also as a threat.

The IoT opportunity: Cross sell and upsell

Sensors can help track and communicate health of the underlying product to the principal supplier. A cartridge that is running out can send an order for a refill as long as the printer is connected. A tire (especially in vehicles of commercial use) can connect with the vehicle telematics system to alert the driver on driving performance, mileage, safety risk and even on how the driver can improve his/her driving habits.

In both these cases, IoT enables the principal supplier to stay engaged with the consumer and have the best shot at a resale when the same need of cartridge replacement or tire replacement arises next.

However, this is not so straightforward.

The IoT threat: Loss of ‘control point’

As time passes, customers will get smart. OEMs (Original Equipment Manufacturers) will embed sensors, SIM cards and other intelligence in the products they sell but the customers will not want this proliferation of service. E.g. they will not want the printer company to get the usage data, but instead want their primary IT infrastructure manager to run the show, who in any case might now be open to charging (and even guaranteeing) a certain cap on ‘cost-per-print’.

Similarly, while the consumer (Fleet operator, in this case) will ask the tire company to reduce ‘cost-per-Km run’ and try to even take guarantee on tire life, it might want its Fleet Management Service provider to help manage its operation cost overall. Tire manufacturer was reliant on the ‘Distribution’ and ‘Solution-selling feet-on-street’ earlier but IoT might still not increase its bargaining power with the consumer.

At Praxis, we evaluate the impact of new technology with the most important lens of: “Who has the control point in the changed world?”, i.e. who does the customer call first in the new IoT era. OEMs can become the control point and seize the IoT opportunity but that often needs more than IoT-led product development. It often needs changes in the operating model and most importantly, the mindset.

In the internet world, this story played out well but saw significant concentration of profit pool with 1-2 players in each space. Search dollars were taken by Google which then through Chrome controlled the window user had to the Internet. Facebook took the first right to communication and then was quickly challenged by WhatsApp which was one step closer to the consumer as it addressed real-time informal communication. We contend that this is similar to the threat all OEMs will face too.

As the profit dollars become concentrated with the control point, OEM economics will get compressed. Whether the control point itself is concentrated or fragmented is a separate question. Irrespective, every business should be thinking about how the customer control point is shifting, and how it needs to get closer to the customer to win in the IoT era.